WEAKNESSES

Economic and financial position damaged by long period of hyperinflation (2000 to 2009)

Underinvestment in infrastructure (particularly energy)

Precarious food and healthcare situation: majority of the population depends on international aid; one of the highest rates of AIDS infection in Africa and in the world

Arrears with international backers

RISK ASSESSMENt

Back to the future: risk of stagflation in 2019

In late 2018, the economy was hit by severe inflationary pressures caused by the country's liquidity crisis. These pressures are expected to intensify in 2019. After the decision in 2009 to abandon the Zimbabwean dollar in favour of foreign currencies (mainly the US dollar), the monetary stability that the country experienced was unable to withstand the challenges of bringing foreign exchange into the country. To overcome these difficulties, in 2016 the government issued bond notes at a rate of USD 1 for a bond note of 1(zimbollar). This measure, which was supported by a USD 500 million loan from Afreximbank, did not have a lasting positive impact. Worse still, widespread mistrust about the real value of these notes led to a rapid depreciation in their real exchange rate, resulting in the rise of a black market for foreign currencies and the government's authorisation, at the end of 2018, to open different bank accounts for US dollars and bond notes, thus recognising the difference in value between the two. Growth, still calculated by the government using the official parity, will be lower than that shown in the budget due to the continued depreciation, and could even be negative when expressed on a per capita basis. Electronic payments through the EcoCash solution, which are used to make up for the shortfall in banknotes, will be subject to a 2% tax. This measure, combined with soaring inflation and the very high unemployment rate, will have a negative impact on the contribution of private consumption to growth, which should, even so, remain slightly positive provided weather conditions for agriculture are favourable. Driven by the cotton and tobacco sectors, agricultural production is expected to just exceed the level reached 20 years ago – after which it plummeted due to expropriations of white farmers – and contribute to export growth. The expansion of the mining sector should also contribute to export growth, but its positive effect is expected to be more than offset by higher import prices. This will likely precipitate the depreciation of the bond note and encourage inflation, further stoking the fears of investors, who were already worried by how the 2018 general elections unfolded. As a result, the impact of investment on growth in 2019 is expected to be virtually zero, as the government has also committed itself to a policy of fiscal austerity by reducing its investment spending. Public spending could even make a negative contribution.

Efforts to alleviate the large twin deficits

Expenditure related to holding the elections, as well as the 17.5% increase in civil servants' salaries (31% of total expenditure), contributed significantly to the deterioration in the government deficit in 2018. The government has therefore decided to pursue a policy of fiscal austerity to consolidate the public accounts. If it is successful, international donors, with whom the country is still in arrears, would be willing to restart a dialogue on releasing budget support funds. According to the 2019 Finance Act, revenues are expected to decrease by the equivalent of 2% of GDP (but increase in nominal terms), while expenditure is expected to decrease by almost 9% of GDP. Risks to the economy could threaten these budget targets (5% deficit), as could the depreciation of the Zimbabwean bond note against the dollar, which is the unit used by the budget. To finance its deficit, and as the international capital market is closed to it, the government will mainly go into domestic debt with commercial banks and the central bank, which will negatively impact its reserves and thus fuel liquidity pressures.

The current account deficit will widen in 2019. Due to the lack of foreign exchange, which limits the increase in imports, the widening trade deficit (13.3% of GDP in 2017) will be contained. South Africa's slow growth could also have an impact on remittances from expatriates, most of whom live in that country, reducing the transfer surplus (11.5% of GDP). The counterpart to the current account deficit will be provided by official transfers and FDI.

Emmerson Mnangagwa wins after contested elections

The general elections of July 2018 saw Emmerson Mnangagwa win a close victory (50.8%). His ZANU-PF Party, which has held power since independence, also secured a majority in the Assembly and Senate. President Mnangagwa had previously taken power at the end of 2017 during a "military-assisted transition", which the army insisted was not a coup d'État and which led to the resignation of his former mentor Robert Mugabe. The event that triggered the move was Mr Mnangagwa’s dismissal as Vice-President with the aim of appointing Grace Mugabe, the former President's wife, to lead the country. The opposition, mainly led by Nelson Chamisa (44.3%), strongly contested the outcome of the elections, protesting numerous irregularities, and was the victim of a repression that killed at least seven people, in which the Vice-President Constantino Chiwenga is suspected of being involved. The elections represented a real test for Mr Mnangagwa after the announcement of measures to improve the business environment. However, investors were not reassured. The country is ranked 189th on the World Bank's corruption indicator and 155th in the Doing Business rankings.